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Senate Defense Bill Targets Contractor Pay

With the U.S. Senate expected this week to pick up its stalled version of the defense authorization bill for fiscal 2014, most headlines out of the Capitol will be about debate over sexual assault in the military, the Guantanamo Bay prison, the Iranian nuclear deal, budget cuts or the possibility that no annual law will be enacted for the first time in 52 years.

But what could matter most for the defense and space sector are a few esoteric provisions that could hit federal contractors in their pocketbooks, literally. Senators may adopt language that seriously pressures contractor salaries, and no matter what is passed or when, a new era of restraint has dawned.

Both the House-passed version of the annual bill, which sets policy for the Pentagon and other national security agencies, and the Senate Armed Services Committee (SASC) version already include language on reforming industry's personal compensation—namely, the amount the government should reimburse or subsidize as part of allowable expenses in future cost-based contracts.

In its summer markup of the bill, the Democrat-led SASC set a reimbursable salary cap of $487,000 that would adjust for inflation but expand exemptions beyond scientists and engineers to include medical professionals, cybersecurity experts and “other workers with unique areas of expertise.” It also called for congressional auditors at the Government Accountability Office (GAO) to boost oversight of and recommendations about the “reasonableness” of defense industry pension plans, specifically the value of benefits earned by participants.

The Republican-controlled House bill, passed over the summer, makes a more modest but similar change. It stipulates $763,029 plus inflation with exemptions for designated science, technology, engineering and mathematics (STEM) as well as medical and manufacturing fields. But it would apply only to the five most highly compensated employees of a contractor doing Pentagon business of at least $500 million in the prior fiscal year—a reversion to the more limited applicability that existed before the final 2013 defense law expanded application to all Defense Department contractors.

Just last week, the covered level for all defense and civil contractors increased to $952,308, based on current law that was altered in industry's favor during the post-9/11 national security spending explosion. Yet because there are still different applicability requirements among defense and civil agencies, including NASA and non-Pentagon military such as the Coast Guard, “the cap may apply to different groups of contractor employees, employed by the same contractor, if that contractor has contracts with both defense and civilian agencies,” the White House states.

In June, the White House proposed lowering the cap to the president's salary of $400,000 and broadening the cap's application across companies, with exceptions for STEM fields. In a response to a GAO report, the Office of Management and Budget said the findings back up its call for reform and stressed that the administration's proposal would save far more than the $180 million cited by GAO's findings, as auditors there surveyed only 7% of the Pentagon's 2012 contract obligations.

In the Senate, Joe Manchin, 3rd (D-W.Va.) is proposing an amendment to cap covered costs at the vice president's salary of $230,700, plus inflation. Separately, Sen. Tom Coburn (R-Okla.) wants additional language to bar any individual or contractor with a “seriously delinquent tax debt” from continuing or taking a position that is within the Pentagon or funded by it, such as consultants.

Trade representatives remain deeply opposed to lowering caps, arguing that contractors need higher reimbursement levels to attract and retain the “best and brightest” workers to an industry that serves national interests. Of course, companies—particularly those with public shareholders—also fear smaller profit margins if they must cover more of the salaries they pay. The law has never stipulated how much contractors can pay, just how much taxpayers reimburse.

The defense and space industry will also be closely monitoring any authorization bill mandates that affect defense and space programs. More than 500 potential amendments have been introduced in the Senate, most expressing a “sense of the Senate,” such as one by John Thune (R-S.D.) that seeks to ensure that upgrading legacy B-1B, B-2 and B-52 bombers remains a high priority. His state's Ellsworth AFB is home to two of three combat squadrons operating the B-1B.

Yet historic gridlock and acrimony in Congress draw into doubt whether the Senate can pass its own bill this year, let alone amendments to it. Long-time analyst Byron Callan of Capital Alpha Partners says, “D.C. is looking even less functional [now].”

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